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Imperial Capital initiates coverage on Allegiant Travel Company (NASDAQ: ALGT) with a Outperform rating and a price target of $164.00, suggesting about 15% upside.

Analyst Michael Derchin commented, "ALGT has a differentiated, low cost business model with strong growth prospects, not reflected in current equity values, in our view, with the stock trading at a valuation that is consistent with its higher cost, low growth peers. ALGT shares got as high as $236 in August 2015, then sold off sharply, to a recent low of about $123 in August 2016, reflecting concerns regarding its rapid capacity growth which impacted operations, contentious labor negotiations, an FAA safety review, and ALGT’s decision to add more off-peak flying because of low oil prices to maximize earnings at lower margins. Despite these issues, ALGT’s operating margins are the highest in the industry, and most of these issues have now been resolved. The pilots ratified a new five-year contract, FAA concerns have been alleviated, and ALGT announced a plan to replace its aging MD-80 fleet with newer Airbus aircraft."

"While ALGT now faces a number of operational and cost challenges as it transitions to a single aircraft type from its current mixed fleet, it plans to maintain lower capacity growth of 5–10% between FY17 and FY19. As a result, ALGT is moving to a greater balance of small, mid-sized, and larger markets and new destination cities such as Newark, Jacksonville, New Orleans, and Austin,complementing traditional leisure destinations, such as Las Vegas and Orlando. Following the MD-80 replacement period, capacity growth is expected to resume between 10% and 15% per year as a result of ALGT’s scalable business model and numerous profitable market opportunities."

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